Why people need to steal…
By Art Jannicelli
www.WhatTheHellAmIDoingHere.com

People will steal what they cannot afford. This is especially true in terms of intellectual property. Intellectual property by definition has a marginal cost that is almost zero. People rationalize the violation/theft of intellectual property as harmless since it really does not result in any actual loss since the marginal cost is zero or very near it. Furthermore, since intellectual property does not have a marginal cost, it is easy to understand how someone might not be willing to pay what the manufacturer is asking, even if they can afford it.

There are numerous examples of this idea in practice. Perhaps the most prevalent and allegedly costly is software piracy. The cost of duplicating software has a marginal cost of zero if it is being transferred electronically. Although, even in a physical form such as CD media it still would cost less than one dollar to duplicate. This creates a situation where the public, with the common knowledge of the marginal cost of the software; is totally unwilling to pay over $300 for a fundamental program like Microsoft Office Professional 2003. The people who pirate this software are unwilling or unable to pay this hefty price tag, because they know and/or believe the price to be unreasonable.
Microsoft states on their anti-piracy website, that the reason they charge what they do, is for several reasons. First, they argue that the cost of their software is cheap in comparison to the money you will make from being able to utilize this highly effective and efficient program.

“By managing your software it's easy to understand the value you receive from your software investment. It's also easier to identify which parts of the organization need software upgrades or new software programs.” (Microsoft)

Secondly, they argue that it is the fact that people steal their intellectual property that makes them have to charge more to recoup these losses.
“If piracy were eliminated in the U.S. and reduced abroad, it is estimated that the industry would produce an additional 1 million jobs by 2005 and contribute $25 billion in tax revenues.” (Microsoft)
Another reason that is not mentioned by Microsoft is that their software is the industry standard and is run on over 90% of computers worldwide.
To the first assertion that the quality of their product justifies the cost, you could refer to the fact that, perhaps it is not the quality of the product that demands the high price it is the fact that its just easier to pay for Office 2003; then to try and interface your non-industry standard program with everyone else using Office 2003. This in itself creates a situation where Microsoft can charge anything they like for their software as long as it remains the dominant program. Recouping costs from piracy is not a valid justification of charging absurd amounts for software, since the marginal cost to Microsoft is essentially zero.

There is a way Microsoft could reduce piracy dramatically without great cost to their bottom line. The most expensive part of making software is the fixed costs. These costs include marketing, programming, and paying royalties on other intellectual property. It is clear that the reason Microsoft charges so much for its software is because it knows business's will pay these prices to stay current with industry standards. On the other hand, consumers are not generally willing or capable of paying these prices. One good reason is that they are not likely to turn a profit on the utilization of Microsoft's intellectual property the same way a business will overtime.

Therefore, perhaps a resolution could be found with a “Market Clearing Price”. This is the concept that as prices fall, consumption increases, until you reach a point of equilibrium where consumption and production match. If Microsoft lowers the price of its software it is possible that the main consumers of Pirated software, i.e. non-business consumers, would be willing to do there part towards paying the fixed costs. So by lowering prices Microsoft would sell more legal copies and could potentially make equivalent profits or greater, since they would be selling significantly more units.

Adam Smith's writings on smuggling, in Chapter 2, part II, article IV, titled “Consumable commodities are either necessaries or luxuries” of his book Wealth of Nations, relate very closely to this example. In these writing he speaks specifically to the effect of tariffs on the amount of smuggling. This relates to the example in that tariffs represent the cost of the software, while the smuggling is representative of the piracy. Smith points out that the higher tariffs are raised the more smuggling is done.

“The high duties which have been imposed upon the importation of many different sorts of foreign goods in order to discourage their consumption in Great Britain, have, in many cases, served only to encourage smuggling…”

He notes that sometimes tariffs are raised so high that they are essentially prohibitions of the importation of that good. Smuggling especially thrives in those conditions. So in the case of Microsoft, it could be argued that the cost of their software has reached a point of being prohibitively expensive to non-business consumers; driving them to pirate what they cannot have by legal means.

Smith also notes that when you cause smuggling you are losing the very revenues you are trying to gain through the loss caused by the smuggling; “…in all cases, have reduced the revenues of the customs below what more moderate duties would have afforded.” Microsoft should draw from this that their prohibitively high prices are hurting their bottom line by denying them the potential income the pirates are earning.

According to Smith,
“…holds perfectly true with regard to such heavy duties, which never could have been imposed, had not the mercantile system taught us, in many cases, to employ taxation as an instrument, not of revenue, but of monopoly.”

Building further on this statement it might also be said that likewise high prices would not be possible without a Microsoft monopoly that allows them to charge these prices instead of making reasonable attempts to end piracy by charging more reasonable prices.

How did Microsoft get to the point of being able to dictate for itself fair market value of its products, as opposed to market forces setting prices? According to steal this idea by Michael Perelman, intellectual property is the key to understanding the position of Microsoft enjoys as the global hegemon of software. Using patents and trademarks, Microsoft is positioning itself to be the company legally capable of creating software for desktop computers.
To do this Microsoft has of course trademarked the names of all their products. This in itself is justifiable; the problem is Microsoft then uses these trademarks to attack any company that even dares to have a similar name. For instance, Walmart tried to sell a cheap Linux based computer called a “Lindows” box. Microsoft sued on the grounds that this was a clear case of trademark infringement, by trying to profit from their name. Ironically, it is obvious to anyone familiar with Apple computers, that they used a windows type desktop before Microsoft.

More importantly though are the patents. Patents are a legal means of declaring an Idea your intellectual property. Perelman quotes Gates,
“If people understood how patents would be granted when most of today's ideas were invented and had taken out patents, the industry would be at a standstill today. I feel certain that some large company will patent some obvious thing related to interface, object orientation, algorithm, application extension, or other crucial technique… A future start-up with no patents of its own will be forced to pay whatever price the giants choose to impose. That price might be high: Established companies have an interest in excluding future competitors.”

In a sense this is already happening, because of the supreme market share Microsoft enjoys its competitors are forced to design their systems to easily interface with Microsoft intellectual property. With the Microsoft monopoly in place, this creates a system that is impossible to escape because smaller companies will continue to cater exclusively to the largest market i.e. Microsoft users. While at the same time, Microsoft will enjoy the benefits of the intellectual property rights holders of the dominant software in the world.
It is clear from Smith that higher prices cause people to steal. With this idea it is possible to summarize that Microsoft's massive problem with piracy, could be solved by adjusting their prices to match those that the market will bare, as opposed to what profit goals they set. Perelman's argument that intellectual property is a means of stifling competition; ensures that Microsoft will be safe as the global software hegemon. This unfortunately explains why Microsoft has no interest in making a realistic attempt at ending piracy. Microsoft knows that they can legally and economically charge these prices because they are a monopoly and at the same time they legally own key trademarks and patents. This is just one example of monopoly power causing its own problems with intellectual property theft. It will probably be just the first of many more to come in the near future.